Assessing and Managing Risk – Nike

Assessing and Managing Risk – Nike

Strategic Planning

Businesses operate in turbulent environments with ever-changing business factors. That means an organization’s management has to respond systematically to the business environment’s unpredictability and uncertainty. Besides, changes that occur in the business environment are quite dynamic, requiring managers to respond with more adaptable solutions. As the business environment becomes more dynamic, organizations’ administration and management structures have developed sophisticated ways to respond to changes. Another factor that justifies strategic plans in an organization is the ever-increasing competition. Firms are in constant competition for revenue, production factors, and customers. That requires them to make critical decisions, such as what to produce and how they will position themselves in the market. Due to the benefits of strategic planning in a firm’s success, there is a need to intertwine strategic planning with the day-to-day running of the business.

One of Nike’s leading strategic alternatives is research and innovation. By setting 84,000 an 84,000-square-foot feet lab, the company shows how serious it is with research and development (Loeb, 2021). The lab tests all athlete products besides looking for solutions to current athlete problems. Nike applies the analytical framework to define the problem, create a solution, conduct competitive analysis, and design a market strategy. The lab helps the company develop new products and avoid potential business risks of sticking with one product line. Nike’s comprehensive lab promises to keep the company on edge as far as innovation is concerned. Innovation is a crucial business factor in the sports apparel and footwear industry, considering the present dynamics. Companies operating in sports apparel and footwear must incorporate chemistry and biology to innovate products that give athletes a better experience.

Nike’s generic differentiation strategy is also part of the strategic alternatives responsible for the company’s success. Nike can create unique products from other market rivals by applying the differentiation strategy. For instance, the company incorporates cutting-edge technology to produce uniquely designed shoes that attract customers. There are also differentiation strategies based on financial metrics that seek to increase the company’s profit margins. However, the primary objective of differentiation is to create unique products for customers in different segments. Differentiation strategy is applied when a company has clear market leadership (Mahdi et al., 2015). Nike is a market leader and can sustain differentiation efforts with considerable marketing and promotional expenses.

Mahdi et al. (2015) also aver that cost leadership is a critical generic differentiation strategy at Nike. The primary objective of cost leadership is to minimize costs along the supply chain to attain the lowest possible cost structure. Companies must produce products that achieve an acceptable quality standard even when chasing cost reduction. Nike leverages its substantial economies of scale and cost reduction strategies to reduce costs. The main objective of cutting costs is to increase its bottom line.

Information shortage

Lack of knowledge about the social and cultural factors of the target audience affected the formulation of practical strategic actions. That is because cultural aspects of the target audience jeopardize a firm’s strategic management. A firm entering a new market should be well versed with the cultural norms of the target audience to adopt designs that do not offend the latter. Some demographics are culturally sensitive, but it is not easy to gather such information sufficiently throughout the global market environment pursued by Nike.

Another aspect of business information that was lacking was awareness about law changes impacting tax and healthcare. Such information is essential for a firm venturing into a new environment since a business needs to incorporate the demands of the new laws into strategic management. For instance, overwhelming environmental laws requiring firms to reduce their carbon footprint in different countries force firms to incorporate necessary actions in their strategic management plans. It is not possible to know these requirements so fast, which affects the company’s operations when it ventures into a new country.

Feasibility and Viability of the Business Strategic Alternatives

One of the critical strategic efforts to mitigate risks is forming strategic partnerships. The nature of the risk and its effect on the business will determine if a partnership will be helpful or not. One of the crucial risk factors that motivate corporations like Nike to enter into strategic alliances is the desire to benefit from dual-sourcing alternatives (Demirkan & Demirkan, 2014). A company like Nike may not gather sufficient production factors in specific business environments, forcing it to enter into a strategic alliance with other firms that have the capacity. Manufacturing strategic alliances help the business save costs and accelerate new product development, both of which contribute positively to a company’s bottom line.

Nike also uses its solid financial muscle to focus on value-enhancing strategies. The company tends to focus on the unique needs of the athletes before releasing a product to the market. The company embeds expert researchers at every organizational level to achieve this. Given the high cost of undertaking research and development, the company must be financially viable to proceed to a new market.

Financial Market Performance

Nike’s stock performance in the New York Stock Exchange (NYSE) has increased by over 8.7% over the past month. Since a financial market rewards companies with solid financials, an increase in any company’s stock price means that its financials have improved over a given period (Nasdaq, 2021).

One financial factor that bolsters stock market performance is the return on investment (ROE), which measures how a company utilizes its investors’ capital to make profits. Being a growth company, Nike reinvests company profits back to improve growth prospects. For that reason, the company has maintained an attractive ROE. The company’s ROE over the past 12 months is 42%, compared to an industry average of 16% (Nasdaq, 2021). All factors are held constant, and a company with a high ROE and profit retention has higher growth prospects than companies that do not bear similar characteristics. The ability to reinvest profits effectively is responsible for Nike’s growth.

However, Nike’s retained earnings ratio is dropping, indicating that the company’s profits could also be declining. With a median payout of 34%, the company maintains a paltry 66% of its income, which has to be shared between funding day to day running of the business and reinvestments (Nasdaq, 2021). Nonetheless, the company is doing better compared to industry peers. If the company continues to retain much of its profits, it is likely to continue experiencing positive growth.

Decision Matrix

A decision matrix helps analysts and business stakeholders analyze strategic alternatives with increased clarity. Introducing a decision matrix in decision making brings three key positive strategic analysis metrics that contribute to better decision making. First, the decision matrix helps organizational players to reduce decision fatigue (Elmontsri, 2014). Besides, it creates objectivity when it comes to decision-making. Finally, it helps management clarify the firm’s objectives and priorities.

Although a decision matrix helps a firm analyze risk, it is not entirely adequate per se. The matrix is simply a range of values in a column used to analyze the potential outcome of particular decisions. The numbers included in the decision matrix are not based on quantitative measurement but are mere guesses (Elmontsri, 2014). The decision matrix is depicted as scientific, yet no form of quantitative measurement occurs.

Due to its simplicity, a decision matrix fails to address the real organizational problems and instead focuses on details with limited business significance. For instance, it would be needless to create a list of evaluation criteria when the situation needs increased internal tolerance.

Another weakness is the fact that the values that are assigned to the weights and scores are subjective. That means some of the results in a decision matrix could be archaic (Elmontsri, 2014). For instance, if the analysis concerns issues that touch on customers, there will be a need to conduct a sensitivity analysis on the part of the customer to determine whether

References

Mahdi, H. A. A., Abbas, M., Mazar, T. I., & George, S. (2015). A Comparative Analysis of          Strategies and Business Models of Nike, Inc. and Adidas Group with special reference to      Competitive Advantage in the context of a Dynamic and Competitive    Environment. International Journal of Business Management and Economic Research, 6(3), 167-177.

Loeb, W. (2021, October 7). Nike’s New High-Tech Lab Leads All Sports Developments. Forbes. https://www.forbes.com/sites/walterloeb/2021/10/07/nikes-new-high-tech-lab-leads-all-sports-development/?sh=67137ab5017c

Demirkan, S., & Demirkan, I. (2014). Implications of strategic alliances for earnings quality and capital market investors. Journal of Business Research, 67(9), 1806-1816.

Nasdaq. (2021, November 17). Is NIKE, Inc.’s (NYSE: NKE) Stock’s Recent Performance Being Led By Its Attractive Financial Prospects? https://www.nasdaq.com/articles/is-nike-inc.s-nyse%3Anke-stocks-recent-performance-being-led-by-its-attractive-financial

Elmontsri, M. (2014). Review of the strengths and weaknesses of risk matrices.

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In a paper of approximately 1,500 words, revisit the strategic alternatives and financial analysis recommendations that offer the greatest opportunities to add value to your firm and assess the risks of each. Use the information you have learned about your company’s business model, industry, competition, and target market in conjunction with the feedback you received on your work in the previous two topics to assist you in addressing the following.

In the Strategic Alternatives Assessment, you evaluated potential growth opportunities and strategies for your firm, using a SWOT analysis to assess the advantages and disadvantages of each. Recapitulate your findings here in conjunction with any instructor feedback received, identifying how you determined your proposed strategic alternative(s) and calculated potential inhibitors to each. Expand upon your initial proposed alternatives to include financial considerations.
Throughout the course, you have developed and submitted reports for your firm based on information that you and your CLC group have acquired and assessed. However, it is equally important to consider what other information, had you been able to locate it, would have been of value in formulating recommendations. What information are you lacking that might assist you and your team in developing and suggesting value-enhancing strategic alternatives? What information are you lacking that would assist you and your team in better assessing and managing possible risks of the proposed alternatives?
When it comes to making strategic recommendations to management, financial considerations weigh significantly on the feasibility and viability of the available options. Revisit the Financial Analysis assignment and, with the incorporation of any instructor feedback received, reiterate your findings on the financial condition and performance of the firm relative to the risks and benefits of forming a strategic alliance, profitability ratios, and possible value-enhancing strategies.
Given your instructor’s feedback and considering how the financial markets have changed since you submitted your Financial Analysis assignment, how would you refine or update your assessment of the organization’s current performance and financial strategies?
How would you use a decision matrix to determine the risks of your suggested strategic alternative and the potential financial implications for your company of pursuing this alternative? Is the decision matrix an effective tool for predicting risk? Why or why not? How does the application of the decision matrix alter what you previously chose as the most advantageous strategy?
Utilizing a risk matrix, identify a minimum of 10 unique risks associated with the strategic alternative you believe will provide the most significant opportunity for your firm to add value. Choose two or three of the most critical risks and discuss their potential impacts on your selected alternative.